White House says wages are growing when measured differently

By Jim Tankersley

Published
2:11 pm PDT, Thursday, September 6, 2018

WASHINGTON — A mystery of the current economic recovery is why wages are stuck in neutral while economic growth revs faster. On Wednesday, the Trump administration tried to solve the puzzle by producing its own measure that shows wages are, in fact, growing.

That same measure, however, showed that wage growth has slowed under President Trump, compared with the end of the Obama administration.

The most recent data from the federal Bureau of Labor Statistics show that, adjusted for inflation, average weekly earnings for American workers grew just 0.1 percent over the past year. Those data also show that average hourly earnings, adjusted for inflation, are down 0.2 percent over the year. Both those figures rely on the Consumer Price Index.

A 32-page report issued Wednesday by the White House Council of Economic Advisers contends the actual growth of inflation-adjusted workers’ compensation over the last year was at least 1 percent — and rises to 1.4 percent when including the additional money that workers are seeing in their paychecks from tax cuts.

The report comes as Democrats have escalated their criticism over the sluggish pace of wage growth at a time of low unemployment and an accelerating economy. Its publication underlines the challenge that administration officials have faced in selling the benefits of the $1.5 trillion tax cut package Trump signed last year, which Republicans promised would bolster wage growth for Americans across the income spectrum.

The additional compensation growth that the report finds, administration officials said, comes from using a different inflation measure, the personal consumption expenditures index, which is also used by the Federal Reserve in its calculations; from including growth in nonwage benefits like health care coverage and paid leave; and from adjusting for the effect of younger and lower-paid workers entering the workforce, which economists such as Mary Daly of the Federal Reserve Bank of San Francisco say is dampening the growth of average wages across the economy in this recovery.

“Much of the commentary about wage growth that we see is influenced by confusion we find about proper measurement,” Kevin Hassett, the chairman of the Council of Economic Advisers, said Wednesday. “The headlines have missed the real wage growth.”

Hassett also acknowledged that, by the council’s own preferred measure, compensation growth had not accelerated under Trump, despite a drop in the unemployment rate, which had fallen below 4 percent for the first time since 2000.

Periods of low unemployment are typically associated with rapid wage growth, as companies are forced to compete for workers with offers of higher pay. While wages have shown modest growth in some professions like construction, they have not experienced the kind of surge that would typically accompany such a strong recovery. Fed officials have continued to watch the phenomenon, but have said they expect wage growth to soon accelerate.

On Wednesday, the Council of Economic Advisers tweeted data that showed pretax compensation growth — adjusted in the administration’s preferred way — neared 3 percent in 2015 and 2 percent in 2016, the last two years of President Barack Obama’s second term. It slowed to about 1.5 percent by the end of 2017, and has slowed again in 2018, despite the passage of the tax cuts. The council said it expected those wage numbers to grow “as the benefits of tax reform are fully realized.”

Republicans centered their pitch for the tax cuts not just on the promise of individual rate cuts giving more money to American families, but also on corporate rate cuts unleashing rapid wage growth for workers. A report the council issued last fall predicted that the corporate tax cut alone would raise wages for a typical American household by $3,000 to $7,000 a year.

Critics of the tax bill said Wednesday that the new White House report confirming those promised gains had yet to appear. “There likely has been no significant effect of the tax legislation on pretax wage rates to this point,” said Greg Leiserson, a former senior economist on the council who is now director of tax policy at the Washington Center for Equitable Growth, a liberal think tank. “This is not a surprise, but it is a problem for proponents who overstated the case for the legislation.”

Hassett said Wednesday that the wage gains from corporate cuts, spurred by increased investments that would in turn drive faster productivity growth and higher worker pay, would take “three to five years” to fully appear. He also said recent investment data suggested those gains were “on track.”

“We expect that the wages — as people get their annual increases and as the capital stock goes online — will accelerate from here,” Hassett said. “But that’s something we’ll have to wait and see what the data say in the second half of the year.”

Research released by economists at the Fed this week found that it was difficult to say how much additional investment had been generated from the tax cuts, which reduced the corporate rate and allowed companies to repatriate money held abroad at a one-time low rate.

Thus far, the economists wrote, the tax cuts “have been associated with a dramatic increase in share buybacks; evidence of an increase in investment is less clear at this stage, as it is likely too early to detect given that the effects may take time to materialize.”